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Unilateral Conduct Working Group Vertical Restraints Multi Year Unilateral Conduct Working Group Vertical Restraints Multi Year Project 2016-2019 April 2019 1 Overview – the vertical restraints project 1. In 2016 the Unilateral Conduct Working Group (UCWG) began a multi-year project examining the effects on competition of vertical restraints. The project sought to promote increased understanding, and where differences exist, to work towards convergence. 2. The vertical restraints project has three distinct stages Scoping phase: to help guide the development of the vertical restraints project. The scoping work identified: an interest in a focus on online vertical restraints, but caution to not overlook matters arising in offline markets support for theoretical analysis of issues arising with vertical restraints, including theories of harm, market failures, and efficiencies support for analysis that focuses on particular forms of restraint, and support for the development of a selected case study resource. Development phase: design of hypothetical vertical restraint scenarios (parity clause, and bans on online platform sales and online search advertising). The scenarios were examined for their possible effect on competition and potential resulting efficiencies. A project group of ICN members and NGAs provided individual/jurisdictional- specific responses for each of the hypothetical scenarios. The responses provided by the project group members have allowed UCWG to develop reports highlighting commonalities and divergent factors in the assessment of the vertical restraints scenarios. A summary of the hypotheticals is provided below. Completion phase: to be carried out in 2019-2020, the completion phase will consider how the work products can be effectively implemented. The third phase of the project is to be determined with the UCWG membership and may include: webinar discussions of the key points that emerged in the hypotheticals; adaption of the hypotheticals into training modules to be made available through ICN Training on Demand; and developing a workbook chapter on vertical restraints. Hypothetical One – online parity requirements 3. The first vertical restraint hypothetical considered the possible effect of online parity requirements included in contractual arrangements between fictional Online Travel Agents (OTAs) and fictional accommodation providers. The full report of this scenario is at Attachment A to this paper. Theories of harm – conduct of BestValueBed 4. It was alleged that BestValueBed, an OTA with a market share of 25%, had included in its contracts with accommodation providers a ‘narrow’ room rate parity requirement. The contract required accommodation providers to offer price parity between listings on BestValueBed’s platform and any other online distribution channel controlled by the Page 2 accommodation provider. It was also alleged that BestValueBed had required accommodation providers to offer room inventory parity between listings on BestValueBed’s platform and other online distribution channels used by the accommodation provider (a ‘wide’ room inventory parity requirement). 5. The project group considered that parity requirements can have a detrimental impact on competition. It was noted that parity requirements make selective discounting more expensive and thereby reduce the frequency of such discounting (as such discounts must, at a minimum, also be offered to the platform benefiting from the parity requirement). 6. Members of the project group held different views on the potential competitive impact of the parity requirements on accommodation providers. View 1: limited or no detrimental impact on competition Narrow room rate parity requirements The narrow price parity clause does not restrict price and quality competition among accommodation providers – as it still allows accommodation providers to make differentiated offers across non-proprietary distribution channels. View 2: detrimental impact on competition Narrow room rate parity requirements The narrow parity requirements soften competition between accommodation providers if they act as a disincentive for accommodation providers to differentiate across distribution channels (e.g. by creating a price floor across some or all distribution channels used by the accommodation provider). It was considered that narrow parity requirements may not only restrict competition between accommodation providers but may also restrict competition between OTAs. Wide room inventory parity requirements It was noted that further information/evidence would be required to establish the existence of, terms, and potential effect of any wide room inventory parity requirement. It was recognised that wide parity clauses affecting price and non-price offerings can soften competition between suppliers by requiring price and inclusion alignment across all distribution channels (giving rise to a horizontal effect). A wide rate parity requirement creates a ‘price floor’ below which an accommodation provider cannot offer its rooms on a different distribution channel without breaching the parity requirement, leading to price uniformity. The alleged wide inventory parity requirement restricts price and non-price competition on room features and inclusions. 7. Members of the project group also held different views on the potential competitive impact of the parity requirements on distribution channels. View 1: limited or no detrimental impact on competition Narrow room rate parity requirements It was noted that the narrow parity requirement is a less intrusive requirement than that of a wide parity requirement and does not affect the relationships between an accommodation provider and other OTA platforms. The narrow price parity clause would not restrict price and quality competition between non-proprietary distribution channels. Page 3 View 2: detrimental impact on competition Narrow room rate parity requirements It was noted that narrow parity requirements applied by OTAs may restrict competition between OTAs in cases where they produce equivalent effects to wide parity requirements (see below). Since the narrow parity requirement prohibits the accommodation provider from offering better room prices on its own website than on the OTA which imposes the requirement, if the accommodation provider wishes its own online offer to match a lower price offered on another OTA portal, it will be obliged to reduce the price on the first OTA portal as well. Depending on the particular facts of the relevant market, in particular the share of sales conducted through direct and indirect channels, this price floor effect may reduce the incentive for OTAs to compete on commission rates, by reducing the incentive for accommodation providers to make use of any lower commission rates offered by competing OTAs. In addition, if accommodation providers and OTAs participate in the same market then the narrow parity requirements would soften competition between the OTA and the distribution channels controlled by the accommodation provider. It was considered that by restricting an accommodation provider from growing direct bookings through more favourable room rate and/or inventory offers, a narrow clause would soften the competitive constraint that the accommodation provider’s distribution channels may otherwise have imposed on non-proprietary distribution channels. Wide room inventory parity requirements It was noted that wide parity requirements can soften and may foreclose price and non-price competition between distribution channels. Differentiated offers by accommodation providers create incentives for distribution channels to compete for their custom, for example by offering lower commission rates or other competitive benefits as reward for better room rates or inventory being listed with their platform. By requiring accommodation providers to offer them their best inventory the OTA (BestValueBed) diminishes the competitive value of what may be offered to consumers through other online distribution channels. This diminishes the incentives of competing OTAs to offer lower commission rates/benefits to accommodation providers and may reduce the competitive tension that would prevent BestValueBed from introducing excessive commission rates. It was also noted that the parity requirement may affect the take up of services for smaller or more marginal OTAs and have a negative impact on their ability to increase scale or market share through listing more competitive offers. A loss of competitive tension could result in a loss of, or a reduction in, innovation in OTA services. Arguments about pro-competitive effects that may be presented and factors relevant to these arguments 8. Project group members noted that, in general, their jurisdiction does have regard to pro- competitive effects, although there are differences in the manner in which such effects can be taken into account across these jurisdictions. Parity requirements may prevent free-riding, by competing OTAs and accommodation providers respectively, on the investments made by BestValueBeds. OTAs promote inter-brand competition between accommodation providers through increased price transparency. OTA platforms may also reduce consumer search costs. The parity requirements may support an OTA’s business model by increasing conversion rates (the ‘look to book’ ratio) by ensuring that the room rates and inventory offered through their platform is superior. Page 4 The project group noted that further consideration would need to be given to whether the parity requirement (wide or narrow) is
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